Gulf Cooperation Council Oil Exporters and the Future of the Dollar

Abstract

Click to increase image sizeClick to decrease image size Notes I would like to thank Andrew Baker, Eric Helleiner, Jonathan Kirchner, Hubert Zimmerman, Paul Bowles and the anonymous reviewers for their comments on earlier drafts. See Ronald I. McKinnon, ‘The Euro Threat is Exaggerated’, The International Economy, Vol.12, No. 60 (1998), pp. 32–3. Ed Blanche, ‘Iran takes on US but at what cost?’, The Middle East, March 2006, p. 23. International Institute for Finance, Regional Briefing Gulf Cooperation Council, 31 May 2007, http://iif.com/emr/emr-af See Louise Story, ‘An Oracle of Oil Predicts $200-a-Barrel Crude’, The New York Times, 21 May 2008. IMF, Regional Economic Outlook: Middle East and Central Asia (International Monetary Fund, 2008), p. 44. http://www.imf.org/external/pubs/ft/reo/2008/MCD/eng/mreo0508.pdf IMF, Regional Economic Outlook, 2008, p. 61. International Institute for Finance, Regional Briefing Gulf Cooperation Council. George Magnus, ‘Petrodollars: Where are they and do they matter?’, UBS Investment Research, 19 July 2006, p. 5. Siddiqi Moin, ‘Gulf Cooperation Council Goes for Growth’, The Middle East, 1 December 2006. McKinsey & Company. ‘The New Power Brokers: How Oil, Asia, Hedge Funds, and Private Equity are Shaping Global Capital Markets’, The McKinsey Quarterly, October 2007, http://www.mckinsey.com/mgi/publications/The_New_Power_Brokers/ International Institute for Finance, Regional Briefing Gulf Cooperation Council Ewe-Ghee Lim, The Euro's Challenge to the Dollar, IMF Working Paper no. 06/153, IMF, 2006, p. 20. Eric Helleiner, ‘Political Determinants of International Currencies: What Future for the US Dollar?’, Review of International Political Economy, Vol. 15, No. 3 (2008), pp. 354–78. See Danske Bank, ‘Will the decline in USD become disorderly?’, FX Crossroads, 14 November 2007. The IMF has also argued that the high oil prices cannot be explained by the ‘fundamentals’ and points to market speculators as a key factor in higher prices. See IMF, Regional Economic Outlook, p. 27. Musa Essayad & Ibrahim Algahtani, ‘Policy Issues Related to Substitution of the US Dollar in Oil Pricing’, International Journal of Global Energy Issues, Vol. 23, No. 1 (2005), p. 75. Government Accounting Office (GAO), The US–Saudi Arabian Joint Commission on Economic Cooperation', GAO, ID 79-7, 22 March 1979. Edward Morse, ‘A New Political Economy of Oil?’, Journal of International Affairs, Vol. 53, No. 1 (1999), p. 4. David E. Spiro, The Hidden Hand of American Hegemony: Petrodollar Recycling and International Markets (Cornell University Press, 1999), pp. 105–26. Musa Essayad & Donald Marx, ‘OPEC and optimal currency portfolios’, Oil, Gas, and Energy Quarterly, Vol. 49, No. 2 (2001), pp. 363–84. See also Oystein Noreng, ‘Oil, the Euro, and the Dollar’, Journal of Energy and Development Vol. 30, No.1 (2004), pp. 53–80. See Bessma Momani, ‘Reacting to Global Forces: Economic and Political Integration of the GCC’, Journal of the Gulf and Arabian Peninsula Studies, Vol. 38, No. 128 (2008), pp. 46–66. Oystein Noreng, ‘The euro and the oil market: new challenges to the industry’, Journal of Energy Finance and Development, Vol. 4, No. 1 (1999), pp. 29–68. Gregory Gause, ‘Relations between the Gulf Cooperation Council States and the United States’, Gulf Research Center, Dubai, 2004. Simon Bromley, ‘The United States and the Control of World Oil’, Government and Opposition, Vol. 40, No. 2 (2005), p. 244. Essayad & Marx, ‘OPEC and optimal currency portfolios’, pp. 364–84. Essayad & Algahtani, ‘Policy Issues Related to Substitution of the US Dollar in Oil Pricing’, p. 72. See Noreng, ‘Oil, the Euro, and the Dollar’. Benjamin Cohen, ‘The Geopolitics of Currencies and the Future of the International System’, Paper prepared for a conference on The Geopolitics of Currencies and Oil, Madrid, 7 November 2003, pp. 18–9. Russian President Putin first alluded to the idea of using petroeuros instead of petrodollars in 1999 during an EU meeting in Helsinki, and again in a news conference with the German Chancellor in Yekaternburg in 2003. In the later meeting, Putin remarked: ‘We do not rule out that it [petroeuro] is possible. That would be interesting for our European partners … but this does not depend solely on us. We do not want to hurt prices on the market.’ Quoted from Catherine Belton, ‘Putin: Why not price oil in Euro?,’ Moscow Times, 10 October 2003, p. 1. William Clark, Petrodollar Warfare: Oil, Iraq and the Future of the Dollar (New Society Publishers, 2005), p. 31. As US rationales for war in Iraq have continued to be exposed for naught – weapons of mass destruction, Iraqi connection to 9/11, spreading democratisation in the Middle East – radical critics have charged that the real motivation behind the war in Iraq was to prevent other OPEC members from also selling oil in euros. See Clark, Petrodollar Warfare, p. 31. ‘Iran Ends Oil Transactions in US Dollars’, The Associated Press, 30 April 2008. Gause, ‘Relations between the Gulf Cooperation Council States and the United States’, pp. 17–8. Morse, ‘A New Political Economy of Oil?’, p. 13. Kamran Dadkhah, ‘Futures market for Crude Oil’, in Siamack Shojai & Bernard S. Katz (eds), The Oil Market in the 1980s (Praeger, 1992), pp. 210–11. Morse, ‘A New Political Economy of Oil?’, p. 21. Elitza Mileva & Nikolaus Siefried, ‘Oil Market Structure, Network Effects and the Choice of Currency for Oil Invoicing’, Occasional Paper Series, European Central Bank, 2007. See Katherine Stephan, ‘Oil Companies and the International Oil Market’, in Svetlana Tsalik & Anya Schiffrin (eds), Covering Oil: A Reporter's Guide to Energy and Development (Open Society Institute, 2005), pp. 47–60. Robert Looney, ‘A Euro-Denominated Oil Bourse in Iran: Potential Major Force In International System?’, Gulf Research Centre, Dubai, 2006, p. 8; Noreng, ‘Oil, the Euro, and the Dollar’, p. 40. Javad Yarjani, Head of the Petroleum Market Analysis Department, OPEC, ‘The Choice of Currency for the Denomination of the Oil Bill’, Speech given at Oviedo, Spain at a meeting on The International Role of the Euro, convened by the Spanish Minster of Economic Affairs, 14 April 2002. Mark Irvine, ‘Long Shot: The prospects for a Conversion to Euro Pricing in Oil Markets’, Elements, Vol. 1, No. 1 (2005), pp. 63–8. Mark Irvine, ‘Long Shot’. Yarjani, ‘The Choice of Currency for the Denomination of the Oil Bill’. Iran has already started to trade oil in euros in bilateral contracts with the EU and has a US$70 billion gas deal with China (the second largest oil consumer), but pricing remained set in US dollars. In December 2006, Iran also announced that its Central Bank would replace all dollar assets and future foreign transactions with euros. Looney, ‘A Euro-Denominated Oil Bourse in Iran?’, p. 8. Ibid., p. 8. It should be noted that because oil pricing is more market-based, the kind of state bargains used to decrease oil prices are now less successful and oil markets are more vulnerable to political crises and risk in oil-producing states. So, oil markets can lead to steep increases in oil prices despite consistent supply because risk is factored into oil prices. Irvine, ‘Long Shot’. Spiro, The Hidden Hand of American Hegemony. Spiro, The Hidden Hand of American Hegemony, p. 37. Government Accounting Office (GAO), ‘Are OPEC Financial Holdings A Danger to the US Banks or the Economy?’, GAO, ID 79-45, 11 June 1979. See Looney, A Euro-Denominated Oil Bourse in Iran, p. 8. See GAO, The US–Saudi Arabian Joint Commission on Economic Cooperation. Ibid., p. 36. Ibid., p. 48. See ‘Saudi Arabia: Current Issues and U.S. Relations’, Congressional Research Service, Library of Congress, 2006. Don De Marino, ‘How Can the U.S. Reopen For Business To The Arab World?’, Middle East Policy, Vol. 13, No. 2 (2006). Heather Timmons, ‘Asia finding rich partners in Mideast’, The New York Times, 1 December 2006. Lawrence Summers, ‘Funds that shake capitalist logic’, The Financial Times, 29 July 2007. See Henry Paulson, ‘Paulson Remarks On Open Investment Before the US–UAE Business Council’, US Department of Treasury, 2 June 2008, http://www.ustreas.gov/press/releases/hp1001.htm ‘The Petrodollar Puzzle’, The Economist, 9 June 2007, p. 86. Moin, ‘Gulf Cooperation Council Goes for Growth’. Christian Menegatti & Brad Setser, ‘Are GCC Dollar Pegs and Impediment to Global Adjustment? And Does Pegging to the Dollar Make Domestic Sense?’, Roubini Global Economic Service, 2006. See ‘Gulf Investments and Its Trends’, Gulf Industrial Bulletin, GOIC, 2006, http://www.goic.org.qa/relatedDocs/GIB/GIB66_E.pdf See Andrew Cooper & Bessma Momani, ‘The Challenge of Re-branding Countries in the Middle East: Opportunities through New Networked Engagements versus Constraints of Embedded Negative Images’, Paper presented to the International Studies Association Annual Conference, San Francisco, 26–29 March 2008. See Matteo Legrenzi, ‘Did the GCC Make a Difference? Institutional Realities and (Un)Intended Consequences’, in Cilja Harders & Matteo Legrenzi (eds), Beyond Regionalism? Regional Cooperation, Regionalism and Regionalization in the Middle East (Ashgate, 2008), pp. 107–24. IMF, Regional Economic Outlook, p. 8. Moin, ‘Gulf Cooperation Council Goes for Growth’. Economics Intelligent Unit (EIU), ‘Near East meets Far East: the rise of Gulf investment in Asia’, September 2007. Ibid., p. 5. Ibid., p. 7. Ramin Toloui, ‘Petrodollars, Asset Prices, and the Global Financial System’ Capital Perspectives, PIMCO, January 2007, p. 6. Institute of International Finance, ‘Regional Briefing Gulf Cooperation Council’, p. 4. Ibid., p. 4. Ugo Fasano & Zubair Iqbal, ‘Common Currency’, Finance and Development, Vol. 39, No. 4 (2002), pp. 1–7, are optimistic that with added institutionalisation, like the creation of a regional central bank, the GCC's currency unification should produce positive results. For GCC currency unification to succeed, as some economists have argued, the GCC needs to liberalise capital and labour mobility, have flexible prices and wages, and have a fiscal transfer system. See ‘Lyons Raises Doubts over GCC Common Currency,’ Middle East Economic Digest (MEED), Vol. 50, No. 6 (2006), p. 24. See Brad Sester, ‘The Case for Exchange Rate Flexibility in Oil-Exporting Economies’, Policy Brief, Peterson Institute for International Economics, November 2007. Kuwait which had used a basket of currencies, aligned its currency closer to the dollar in preparation for the currency union in 2003 and then again de-pegged its currency in 2007. ‘The Dollar: Time to break free’, The Economist, 22 November 2007. IMF, Regional Economic Outlook, p. 3. Jeffrey Frankel, ‘A Proposed Monetary Regime for Small Commodity Exporters: Peg to the Export Price’, International Finance, Vol. 6, No. 1 (March 2003), pp. 61–88. See ‘UAE Rejects calls to drop the dollar’, Khaleej Times, 29 February 2008. See ‘Countdown to lift-off’, The Economist, 22 November 2007. Outside the GCC, moreover, Syria also announced that it would use euros in government transactions as opposed to dollars and a number of other Middle East central banks hinted of adopting similar policies in reaction to the failed ports deal. See Philip Thornton, ‘Arab central banks move assets out of dollar’, The Independent, 14 March 2006. Veronica Brown, ‘DIFC CEO sees more Gulf FX moves away from dollar’, Reuters, 25 March 2007. See Sester, ‘The Case for Exchange Rate Flexibility in Oil-Exporting Economies’; Gerard Lyons, ‘Middle East must loosen ties to the dollar,’ The Financial Times, 6 December 2007. The name for the proposed currency has yet to be decided upon. Some media reports have referred to it as the Khaleej Dinar, although this will be a contested term. ‘Regional Currency Areas and the use of Foreign Currencies’, BIS Papers, No. 17 (2003), available at http://www.bis.org/publ/bppdf/bispap17.pdf Emilie Rutledge, ‘Gulf Monetary Union is a cracking project?’, Gulf News, 16 December 2006; see also Menegatti and Setser, ‘Are GCC Dollar Pegs and Impediment to Global Adjustment?’ Gaurav Ghose, ‘UAE Doubts union deadline’, Gulf News, 18 December 2006; see also Rutledge, ‘Gulf Monetary Union is a cracking project?’ Mohammed Abbas, ‘Bahrain to ditch dollar peg, report claims’, Reuters, 11 December 2007. Andrew England, ‘Saudis urged to revalue riyal’, The Financial Times, 13 January 2008. Simeon Kerr, ‘Qatar considers dropping dollar peg’, The Financial Times, 30 January 2008. Noreng, ‘Oil, the Euro, and the Dollar’. Henner Furtig, ‘GCC–EU Political Cooperation: Myth or Reality?’, British Journal of Middle Eastern Studies, Vol. 31, No. 1 (2004), p. 30. Furtig, ‘GCC–EU Political Cooperation’, p. 30. Bessma Momani, ‘A Middle East Free Trade Area: Economic Interdependence and Peace Considered’, The World Economy, Vol. 30, No. 11 (2007), pp. 1682–700. Bessma Momani, ‘Reacting to Global Forces: Economic and Political Integration of the GCC’, Journal of the Gulf and Arabian Peninsula Studies, Vol. 38, No. 128 (2008), pp. 46–66. Agata Antkiewicz & Bessma Momani, ‘Pursuing Geopolitical Stability through Interregional Trade: The EU's Motives for Negotiating with the Gulf Cooperation Council (GCC)’, CIGI Working Paper 31, Centre for International Governance and Innovation, 2007. Daniel Hanna, ‘A New Fiscal Framework for GCC Countries Ahead of Monetary Union’, International Economics Programme, Vol. 6, No. 2 (2006), p. 7. See Marc O'Reilly & Wesley Renfro, ‘Evolving Empire: America's ‘Emirates’ Strategy in the Persian Gulf', International Studies Perspectives, Vol. 8, No. 2 (2007), pp. 137–51. Furtig, ‘GCC–EU Political Cooperation’, p. 30. Eckart Woertz, ‘The Role of Gold in the Unified GCC Currency’, Gulf Research Centre, Dubai, 2005.